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’Til death us do part: does the law of refusal to deal make your distributor a lifetime partner?

Since 1976, Canada has had a “refusal to deal” law that allows the Competition Tribunal to order firms to take on – or prevent them from cutting off – distributors of their products in certain circumstances. Unlike virtually all the other reviewable vertical practices under Canada’s Competition Act, Section 75 of the Act did not have an express competitive effects test requiring that the practice led or would lead to a substantial lessening or prevention of competition. The four elements of the refusal to deal provision, between 1976 and 2002, were as follows:

(a) a person is substantially affected in his business or is precluded from carrying on business due to his inability to obtain adequate supplies of a product anywhere in a market on usual trade terms,

(b) the person referred to in paragraph (a) is unable to obtain adequate supplies of the product because of insufficient competition among suppliers of the product in the market,

(c) the person referred to in paragraph (a) is willing and able to meet the usual trade terms of the supplier or suppliers of the product, and

(d) the product is in ample supply.

During that period, only five applications were brought to the Competition Tribunal respecting refusal to supply, and only three of these considered Section 75 in any detail. This state of affairs existed because, despite the lack of an express competitive effects test, only the Commissioner of Competition could bring cases, and various Commissioners over those years only brought cases when they believed there were adverse competitive effects.

That changed in 2002, when exclusive access to the Competition Tribunal for refusal to deal was taken from the Commissioner of Competition. For the first time, those directly and substantially affected by the conduct obtained the right to bring cases in their own name, with leave to the Tribunal.

At the same time that this right to bring a private case was created, the substantive law was amended to add a fifth element – the requirement that the conduct have or be likely to have an adverse effect on competition in a market. However, as noted above, this element differs from the general anti-competitive effects test found in other provisions of the Act. It does not require a substantial lessening of competition, but only an “adverse” effect.

This difference makes bringing a refusal to deal case much easier than it would otherwise have been, for virtually any refusal to supply removes one potential supplier from the marketplace, and therefore, at least prima facie, is likely to have some “adverse” effect on competition.

The consequences of this change have been fully predictable. Indeed, if one were to assess the importance of various aspects of Canada’s competition law merely on the basis of the number of cases filed with the Competition Tribunal, one would conclude that refusal to deal is the central antitrust problem of our time. Section 75 cases overwhelmingly dominate. Since 2002, there have been 15 refusal to deal cases filed, all by private parties. Since the time that private access to the Tribunal was given for refusal to deal, as well as exclusive dealing, market restriction and tied selling cases, refusal to deal has been an aspect of each and every one of the private cases brought, and in only two of the cases were other aspects added to the refusal to deal claim.

Despite the fact that many cases have been commenced, it would be fair to note that fewer than half of those cases have been granted leave by the Tribunal to proceed, and many of those have been resolved one way or another short of a hearing. The only case that has gone to a final hearing, B-Filer,1 has resulted in a dismissal of the applicant’s case.

Nevertheless, the fact that cases can be brought by persons cut off from supply – or even initially refused supply – despite the fact that there is no breach of contract, has a practical impact on the willingness of product suppliers to set up third-party distribution arrangements. They can have no real confidence that those arrangements are terminable in accordance with agreed upon contract terms. Consequently, the risks of establishing such distribution arrangements are higher than they would otherwise be, and therefore the willingness of suppliers to enter into third-party distribution arrangements, rather than vertically integrated product distribution, is lower. This suggests a lower level of distribution efficiency than would exist but for Section 75 of the Act and its enforcement by private parties.

As noted above, the only refusal to deal case which has reached the hearing stage involved B-Filer Inc. B-Filer’s business offered purchasers who held bank debit cards the ability to use those cards to pay participating vendors for the purchase of goods and services over the Internet. B-Filer sought an Order directing the Bank of Nova Scotia (“BNS”) to accept B-Filer as a customer on usual trade terms.

On December 20, 2006, the Tribunal dismissed B-Filer’s application under Section 75. The Tribunal rejected B-Filer’s application for a number of reasons:

B-Filer’s business actually grew during the period of refusal to supply – but B-Filer argued it grew less than it would otherwise have. The Tribunal found that the loss of potential growth could constitute a relevant effect for the purposes of the provision, but in the particular case it concluded that B-Filer had not shown that the refusal to supply led to a negative impact on it.

The Tribunal found the relevant product market to be biller status at BNS, and deposit accounts that allow for the deposit of e-mail money transfers (“EMTs”). Upon termination of banking services by BNS, B-Filer was able to replace these services with EMTs into deposit accounts at other banks such that, in the Tribunal’s view, B-Filer was not substantially affected in its business, either from the perspective of reduced growth in revenues or a change in growth opportunities.

BNS may have had a good business justification (involving concern about B-Filer obtaining confidential customer information) to overcome the argument that the reason B-Filer could not obtain adequate supply of a product was insufficient competition.

The Tribunal had to compare the state of competition in the market that would have existed but for the refusal to deal with that which actually existed with the refusal to deal. In this case, it concluded that B-Filer failed to prove an adverse effect on competition.

After determining that BNS’s on-line debit product Interac Online and B-Filer’s UseMyBank Service were not in the same market for purposes of current or future competition, the Tribunal concluded that the refusal to deal was not likely to have any effect on competition, let alone an adverse effect on competition.

Finally, the Tribunal noted that it had discretion as to whether or not to make an order, and in this case, because of its concern respecting the sharing of confidential banking information, the Tribunal would have exercised its discretion against making an order, even if it had found that the necessary elements were present.

B-Filer filed an appeal with the Federal Court of Appeal in January 2007. The appeal remains outstanding.

The Tribunal was clearly sympathetic to BNS’s justification for cutting off supply to B-Filer, both in finding that the reason B-Filer could not obtain supply was not due to insufficient competition, and also in stating that it would have exercised its discretion in favour of BNS in any event. However, the facts in this case were unusual. How the Tribunal will react in the more usual situation of a supplier simply seeking to restructure its distribution arrangements will be important to the future course of refusal to deal litigation, and for the ability of Canadian firms to ensure that their distribution systems are efficient.

Most of the cases which have not proceeded have been denied leave on the basis that the applicant was not sufficiently substantially affected by the refusal to supply. However, in many cases a distributor will in fact be substantially affected by the refusal of its longtime supplier to continue supplying it – even if that refusal is entirely consistent with the contract the parties have entered into. While that refusal may not lead to any significant effect on competition, it may, at the margins, have a de minimis effect. That is why the existing refusal to deal provision of the Competition Act represents a genuine challenge for suppliers of products in Canada. They cannot know with confidence that terminating a distribution arrangement will not lead to the cost and expense of Tribunal proceedings – perhaps involving an interim supply order – and in many cases they cannot have confidence that a final order will not be made requiring continuing supply. Consequently, at least until the law is clarified, entering into a supply arrangement in Canada will be easier than exiting from one.

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